FidelityJan 30 2017

Interview: John Clougherty on Fidelity's place in the market

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Interview: John Clougherty on Fidelity's place in the market
John Clougherty

There were two notable mergers in the retail asset management space announced in the final quarter of last year: Henderson Global Investors and Janus Capital are set to join forces, and Liontrust’s deal to buy Alliance Trust Investments was announced in December.

It appears to herald a new era for the industry; many – including Fidelity International’s head of UK wholesale John Clougherty – believe this is just the start of a more lasting trend.

“You’ll see a lot of [fund groups] getting bought or seeking mergers to try and get the scale they need, and you may even see some people stripping back to core capabilities, selling off or reducing their scale to try and get their cost base to an attractive proposition,” he notes. “I really do think M&A [merger and acquisition] activity will continue and, therefore, the number of fund groups offering UK customers funds in five years’ time will be substantially lower than it is today.”

Asked if Fidelity is likely to go on the acquisition trail, he replies: “It’s not our style and I think we would rather grow something [organically]. If we saw an area of the market we didn’t have a world-class capability in, we’d seek to hire and build internally. We’re not known for acquisitions and I don’t see that changing. We’re very particular about the way we do things; we’re very research-orientated, and I think a product is much more likely to succeed if you build it than if you buy it and try and make it fit in your organisation. 

“I haven’t got a crystal ball, so I’m not ruling it out. But, given our scale and breadth, there are very few areas that Fidelity doesn’t have an existing fund management capability in and that’s a conscious choice.”

Fidelity has boosted its presence across most of the main asset classes in recent times, and caused a stir in the highly competitive passive product space a few years ago with its pricing strategy. Last year the group also made a high-profile hire in the form of Bill McQuaker from Henderson, who has joined the 26-strong multi-asset team. In January Fidelity confirmed Mr McQuaker will manage the five-strong Multi Asset Open range. Fidelity also stated the investment objectives of the risk-rated range will be updated in March to show “specific return targets and provide enhanced clarity on the underlying investments”.

Mr Clougherty explains: “We didn’t hire Bill to come in and launch loads of new products, we hired him to bolster our capability in a space where we already have one of the largest teams in the industry.

“The multi-asset team runs about $50bn (£40.7bn) of assets and I’ve used the phrase before but we’re one of the biggest, lesser known multi-asset managers in the market because our profile has been built around delivering single-strategy equity and bond funds.”

Multi-asset products have taken off in the past few years and Fidelity has positioned itself to cater to the needs of the retirement market. Mr Clougherty says that was part of his brief when he returned to Fidelity, having previously worked at the company in the late 1980s and early 1990s. On his return in June 2012, he was tasked with considering the business’s strengths and how to align those with market needs.

He says: “One of the things I wanted to do was get us to concentrate on no more than four or five key investment themes, supported by the funds that could deliver for clients.

“Everyone was searching for income and there was the equity income theme within that, so I wanted to focus on Dan Roberts’ Global Dividend fund and Michael Clark’s UK Dividend fund. Because we’d had such good performance, I wanted to make sure we supported brokers and customers with all that information and focused on equity income. Indeed, for the two enhanced versions of those funds that we subsequently launched (to help people looking for income but not from fixed income), we wanted the growth potential involved in equity income.”

He continues: “We also looked at where we were really differentiated in terms of the search for alpha. We focused on the emerging market franchise, American Special Situations and our Asian fund range, which is the broadest in the market in terms of breadth and capability.

“Again, we started to build the profile of those managers and those strategies for people looking for growth vehicles.”

He adds: “The multi-asset business was the other big growth area. Everyone was predicting growth in that area both pre- and post-RDR because, as well as advisers constructing their own investment portfolios for clients, they would also outsource – we saw outsourcing as a trend that would come through, and it has.”

Having set up Fidelity’s stall in active asset management, the group turned its attention to passive offerings, following in the wake of its parent company in the US that already had a significant index range.

Mr Clougherty explains: “We launched seven equity index funds in the UK. We set a completely new price point in the marketplace. Obviously, there has been competitor action but our objective was to disrupt that market and radically reduce the cost of accessing index strategies for UK fund buyers and we definitely succeeded in doing that.” 

He insists the firm never saw it as a “price war” but it certainly helped reignite the passive versus active debate. However, he believes there is room for both in the market: “People don’t set out to buy an active fund and then suddenly see a passive fund more cheaply available and buy that. 

“People who are looking for outperformance are looking for value added from the people they are employing to do their fund management and, while passive at various points in the cycle is attractive because it’s cheap, active management has substantially outperformed passive for the past few years. Empirically, there has probably never been a greater argument to have active funds over passive.”

While he claims there are no product gaps to fill at the group now, there are areas of the business he is still keen to grow. One of these is the Asian ex Japan franchise, which includes the China Special Situations investment trust, as well as the Asia Pacific Opportunities fund run by Anthony Srom.

A year on from announcing plans to move into the ETF market, the firm is biding its time. 

“We don’t have a noticeable gap in the product range, so I don’t think you’ll be seeing lots of product launches from Fidelity,” he says. “We’re building capability in the exchange-traded fund market. We’re not yet at the stage of launching a product but we are assessing market demand.”

While discussing the challenges facing fund managers, unsurprisingly the issue of cost is the first to come up. He firmly believes active management is a cost that needs to be paid for.

“If you look at the shape of the value chain in terms of what it costs to get advice and then buy, hold and administer the fund, that whole chain is being squeezed but the area that’s come under the most scrutiny is the cost of fund management. Fund management is actually the highest input cost of anything by far in that value chain,” he asserts.

“If customers want active returns – which requires maintaining the capability to run people’s money properly and having the right expertise to manage equity, bond and multi-asset funds – that is not a cheap activity. And yet it’s the area of most focus, which is unhealthy. Of course, I would say that as the head of funds business and probably not too many people would agree.”

Mr Clougherty concludes: “The challenge is can you run a fund management business at a reasonable profit for the next 10 years, given the direction of travel? That’s part of my reason for saying if you’re big and have scale you can probably weather those challenges, likewise if you’re small and have very low costs. If you’re in the middle, I think you’ll find it very tough.”